U.S. stocks regulator increases scrutiny of algorithmic trading

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(Reuters) - Employees of U.S. trading firms responsible for designing algorithmic trading strategies will be required to register with regulators as securities traders under a new rule approved on Thursday aimed at reducing risky and manipulative trading.

People who design, develop, or significantly modify a firm’s automated trading systems, which generate or route stock orders, will have to register with Wall Street’s self-funded watchdog, the Financial Industry Regulatory Authority, the U.S. Securities and Exchange Commission said in a filing.

Those employees, as well as those responsible for day-to-day supervision of the algorithm’s activities, will have to pass a securities trading qualification examination as part of the process.

Algorithmic trading relies on complicated mathematical formulas, with little to no human intervention, to buy or sell stocks. The automated strategies have made trading cheaper and more efficient, but the speed at which they operate can cause glitches to cascade quickly through the market. They can also make market manipulation difficult for regulators to detect.

FINRA said the new rule and enhanced education requirements should reduce “problematic conduct” stemming from algorithmic trading strategies, such as failure to check for order accuracy, inappropriate levels of messaging traffic, and inadequate risk management controls.

Separately, the SEC recently said it plans to propose a rule to enhance the record-keeping requirements of broker-dealers as part of its efforts to boost the oversight of algorithmic trading.